The Children’s Place, Inc. — Form 10-Q Summary
Period clarification: The request specifies 2016 Q2, but the supplied filing is for the 13 and 26 weeks ended July 29, 2017, with comparisons to July 30, 2016. The summary below reflects the filing provided.
Business context and reporting period
The Children’s Place is a North American children’s apparel retailer with U.S. and International segments, e-commerce, wholesale operations, and international franchisees. At July 29, 2017, it operated 1,026 stores and reported 161 international franchise distribution points in 19 countries. The filing is unaudited and notes that seasonal year-to-date results are not necessarily indicative of full-year results.
Financial performance and liquidity
| Metric | 13 weeks ended July 29, 2017 | 13 weeks ended July 30, 2016 | 26 weeks ended July 29, 2017 | 26 weeks ended July 30, 2016 |
|---|---|---|---|---|
| Net sales | $373.6 million | $371.4 million | $810.3 million | $790.8 million |
| Gross margin | 34.4% | 33.4% | 36.9% | 36.6% |
| Operating income | $3.2 million | $(2.9) million | $45.5 million | $36.7 million |
| Net income (loss) | $14.3 million | $(2.0) million | $50.5 million | $24.0 million |
| Diluted EPS | $0.79 | $(0.11) | $2.76 | $1.24 |
- Quarterly sales grew 0.6%; comparable retail sales rose 3.1%. Year-to-date sales grew 2.5%; comparable retail sales rose 4.7%.
- Gross margin improved 100 basis points for the quarter and 30 basis points year to date, primarily on higher average unit retail and merchandise margin, partly offset by greater e-commerce sales mix.
- Operating cash flow was $71.4 million year to date, versus $75.2 million in 2016. Capital expenditures were $23.2 million; cash and cash equivalents increased by $8.6 million to $202.3 million.
- At July 29, cash and cash equivalents were $202.3 million, short-term investments $55.8 million, and revolving borrowings $54.5 million. Revolver availability was $188.5 million. Working capital was $259.9 million, versus $268.4 million a year earlier.
- Cash dividends paid year to date were $14.1 million; the company repurchased approximately $57.4 million of shares. The quarterly dividend was $0.40 per share.
Material changes versus the prior comparable period
- Quarterly results improved from an operating and net loss to profit; year-to-date net income more than doubled. The comparison is substantially affected by tax benefits, not just operating performance.
- Year-to-date U.S. segment sales increased 4.0% to $722.1 million, while International sales decreased 8.7% to $88.1 million. U.S. comparable sales rose 5.7%; Canadian comparable sales fell 3.4%.
- The effective tax benefit included $12.3 million of excess stock-compensation tax benefits in the quarter and $15.8 million year to date, following adoption of new share-based-payment guidance. The company also released a $4.0 million uncertain-tax-position reserve in Q1.
- Quarterly impairment charges were $1.0 million, compared with $2.8 million a year earlier. Year-to-date 2017 SG&A included approximately $5.9 million of legal settlement, tax-audit, foreign-exchange-control and restructuring costs.
Outlook, commentary, risks and contingencies
- Management expected fiscal 2017 capital expenditures of approximately $60 million, mainly for business transformation initiatives, versus $35 million in fiscal 2016. It stated that cash, operating cash flow and revolver availability should fund foreseeable requirements. The filing provides no specific earnings or sales guidance.
- The company planned to close approximately 300 stores through fiscal 2020, including 156 already closed. Management viewed competitor Gymboree’s announced store closures as a potential market opportunity.
- Strategic initiatives include product and inventory management, digital transformation, alternate distribution channels and fleet optimization. The company planned a broader U.S. rollout of buy-online-pick-up-in-store during Q3 2017 and an Amazon Canada launch for Holiday 2017.
- A proposed class-action settlement concerning discount advertising was recorded as a $5.0 million reserve in Q1 2017; court approval remained outstanding. If rejected, litigation could resume. Management said other routine proceedings were not expected to have a material adverse effect.
- Key disclosed risks include fashion and consumer-preference shifts, competition and consumer spending, execution of strategic initiatives, supply-chain disruption, input-cost increases, weather, store impairment, and foreign-exchange exposure. Most cash was held in foreign subsidiaries; repatriation could trigger U.S. federal and certain state taxes, and management did not intend to repatriate it.
- Management expected adoption of the lease accounting standard in fiscal 2019 to create material right-of-use assets and lease liabilities. It was assessing the impact of the revenue-recognition standard, planned for adoption in Q1 fiscal 2018.
Important facts for investors to verify
- Confirm the intended reporting period: the supplied filing is Q2 2017, not Q2 2016.
- Separate operating improvement from the sizable stock-compensation tax benefits and other tax items when assessing earnings and EPS.
- Track International/Canadian sales trends, comparable sales, currency impacts, and the effect of store closures on reported revenue.
- Monitor planned capital spending, seasonal inventory needs, revolver usage, and the location and accessibility of overseas cash.
- Check court approval and final cost of the advertising settlement, progress on store closures and digital initiatives, and the eventual accounting-standard impacts.